Bank of Japan to consider gradually cutting bond buying, Nikkei says

BY Reuters | ECONOMIC | 06/12/24 06:35 PM EDT

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Board to consider gradual balance sheet reduction - Nikkei

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Move would mark slow, steady retreat from massive stimulus

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BOJ seen keeping short-term policy rate steady

(Recasts with details from report, context on BOJ policy)

By Mariko Katsumura and Leika Kihara

TOKYO, June 13 (Reuters) - The Bank of Japan will consider trimming its bond buying at its two-day policy meeting ending on Friday, the Nikkei newspaper reported, taking a first key step to reducing its almost $5 trillion balance sheet.

The nine-member board will debate a plan to gradually shrink the size of its balance sheet by tweaking the range in which it buys government bonds each month, the paper said on Thursday without citing sources.

Reuters reported last week that BOJ policymakers were brainstorming ways to slow its bond buying and may offer fresh guidance at the June meeting, in a slow but steady retreat from its massive monetary stimulus.

Any reduction in bond buying would be gradual with a focus on avoiding any abrupt spike in long-term yields, the sources had told Reuters.

A further cut would mean the BOJ moves to quantitative tightening (QT), reducing a balance sheet that is now five times the U.S. Federal Reserve's in ratio-to-GDP terms. At the meeting, the BOJ is expected to keep interest rates steady at 0-0.1%.

"It was probably a foregone conclusion that the BOJ would debate bond tapering at this week's meeting," said Toru Suehiro, chief economist at Daiwa Securities in Tokyo.

"The focus now shifts the actual nuance on how the BOJ would taper bond purchases and its assessment on consumption, which will have implications on the future rate hike path," he said.

The BOJ's efforts to normalise monetary policy comes as other major central banks, having already tightening monetary policy aggressively to combat soaring inflation, contemplate cutting interest rates.

The Federal Reserve held interest rates steady on Wednesday and signalled the chance of a single cut this year. The European Central Bank slashed interest rates last week for the first time since 2019.

In March, the BOJ ended eight years of negative interest rates and yield curve control (YCC), a policy that caps the benchmark 10-year yield around 0% with huge bond buying.

But the bank pledged to keep buying roughly 6 trillion yen ($38 billion) worth of government bonds per month - just enough to maintain its balance sheet. Under a plan revised each quarter, it now buys government bonds in a range of 4.8 trillion to 7 trillion yen each month.

An unscheduled cut in bond buying on May 13, which fell within the set range, pushed the 10-year government bond yield to a 13-year high of 1.1% earlier this month, as market players saw the move as a prelude to a more full-fledged reduction in its bond purchases. The benchmark yield has fallen since then and stood at 0.995% on Wednesday.

BOJ Governor Kazuo Ueda has repeatedly said the BOJ will eventually shrink its 750-trillion-yen balance sheet, which is nearly 1.3 times the size of Japan's economy, but has left no clues on how soon the process will start. ($1 = 156.5900 yen) (Reporting by Mariko Katsumura and Leika Kihara; editing by Jonathan Oatis, Richard Chang and Sonali Paul)

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